D Murali

When the clutch becomes a crutch

D. MURALI | Updated on June 17, 2011 Published on June 09, 2011

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There are distinct parallels between the foray of Indian government into rural banking and the role of Fannie Mae and Freddie Mac in the US, observe Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh, and Lawrence J. White, in Guaranteed to Fail ( Harper).

The first parallel they see is that affordable home ownership goals of the US relate to ‘priority sector lending norms' in India, focused on agriculture and small-scale industries, but also including housing. Secondly, the GSE (government-sponsored enterprises) in the US correspond to the large presence of state-owned banks in India. “Third, the forbearance that was exhibited towards the GSEs – in good times through generous capital requirements and in bad times through government conservatism – mirrors closely the reluctance of the Indian government to shut down any state-owned bank.”

The authors argue that the quality of lending is poor since banks are effectively forced to lend on terms that they would not have chosen to, had they been entirely private and free of state-enforced lending norms. When the loans become bad, ‘the strong clutch of the government becomes a crutch, readily extending support where the invisible hand of the market would have resulted in shutting down of banks.'

Acharya et al. note that since the state-owned banks never fail, they do not care about the quality of their loans, and since they do not exercise due diligence with respect to borrowers, the farmers do not invest in highly productive and innovative agricultural methods. “Thus, neither the banks nor the farmers are subject to the capitalist creative destruction that would seem essential for success in a country where the rural, farming-focused, sector is so large, yet low on productivity.”

Educative perspective.

Business terms to reckon with

If you are looking for a starter material on business, try Biz World by Ravi Handa and Avinash Maurya ( www.landmarkonthenet.com). For instance, a section on ‘Finance' opens with ‘account,' defined as ‘a reckoning of money received and paid, probably derived from the Latin word computus, meaning a calculation.'

Next is ‘bankruptcy,' tracing its origin to the practice of banca rotta in Italy, where if a merchant was unable to pay back his debts, his creditors would get together and destroy his trading bench. Following this is ‘belly up,' a colourful way to describe a company that is in deep financial trouble.

The only entry for ‘G' is ‘great fool theory,' a.k.a. ‘survivor investing,' referring to the assumption held by one who makes a questionable investment, that he will be able to sell it later to a ‘greater fool.' It is about buying something not because you believe that it is worth the price, but because you believe that you will be able to sell it to someone else at an even higher price, the authors explain.

‘Head & shoulder' may remind you of a cosmetics product, but as technical analysts would instruct, ‘when a price trend is in the process of reversal either from a bullish or bearish trend, a characteristic pattern takes shape and is recognised as reversal formation.'

Good for beginners.

Financing small enterprises

Foremost among ‘recent innovations and initiatives' — discussed in India Micro, Small & Medium Enterprises Report 2011 from the Institute of Small Enterprises and Development ( www.isedonline.org) — is the establishment of centralised processing cells in banks and financing institutions.

Reminding readers about a key recommendation of the Chakraborty Committee that up to Rs 10 million loan origination, sanction, monitoring and so on should take place at the branch level, the report however rues that the implementation of this recommendation is yet to see the light of the day. In a section on ‘venture capital financing,' the authors of the report fret that both the deal flows and the angel investment portfolios are tiny, and that just about 50 start-ups a year appear to be benefited. Behind the poor flows they see social and cultural issues, such as ‘lack of trust, cynicism about founders/ promoters, labour laws, tax avoidance/ evasion route of the enterprises.'

The report highlights the SME (small and medium enterprises) Fund, an initiative from the Government of India and SIDBI to give impetus to the flow of funds to the SME sector. “Under the Fund, assistance is being provided to SMEs at an interest rate of 200 basis points below the Bank's PLR. Direct assistance is being extended to SMEs through SIDBI's own offices at 9.5 per cent rate of interest as also by way of providing refinance to the primary lending institutions.”

A study of value.

Ready for ‘bean' counting?

Any accountant with interest in farming may like to read up how the fair value model is applied to agriculture, as per IAS 41. This standard — as T. P. Ghosh writes in Indian Accounting Standards (Ind AS) and IFRSs for Non-finance Executives ( www.taxmann.com) – is applied to account for biological assets, agricultural produce at the point of harvest, and government grants relating to biological assets.

For starters, ‘agricultural activity' is ‘a specialised activity defined as an entity's management of the biological transformation of biological assets for sale into agricultural produce or into additional biological assets.' It covers diverse range of activities such as livestock farming, forestry, annual or perennial cropping, cultivating orchards, plantations, floriculture and aquaculture, the book says. “Any unmanaged activity like ocean fishing does not fall under this standard. Similarly, managing recreational activities such as zoos and game parks is not agricultural activity.”

While ‘biological assets' are ‘living animals or plants such as sheep, trees, and vines,' the phrase ‘biological transformation' is defined as the process of growth, degeneration, production, and procreation causing ‘qualitative and quantitative changes.' Examples of the ‘qualitative' nature are changes to density, ripeness, fat or protein content, and fibre strength; and the ‘quantitative' changes relate to weight, length, and so on.

Recommended guidance to bean-counters in the field.

Published on June 09, 2011
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